Friday, July 10, 2009

Indian stimulus in perspective?

The objective of any fiscal stimulus is to increase the aggregate demand by primarily getting money into the hands of people who are likely to immediately spend, and not save or repay their debts, the money they receive. The most effective way to achieve this is for government spending on various items, discussed here, here, here and here.

An excellent article in the Businessline examines the numbers behind the Rs 1,86,000 Cr fiscal stimulus of the Government of India (that raised the fiscal deficit from 2.7% to 6.2%) and a lot of other such numbers and and finds that they do not add up,

"Out of the proclaimed stimulus of Rs 1,86,000 crore, over Rs 1,30,000 crore — that is more than two-thirds — consist of fall in income-tax collections (Rs 20,000 crore), Sixth Pay Commission dues [Rs 40,000 crore], fertiliser subsidy [Rs 45,000 crore], food subsidy [Rs 11,000 crore], farm debt waiver [Rs 15,000 crore], and extra interest on borrowings [Rs 2,000 crore]. None of these items is related to the stimulus. The fall in income-taxes is due to the meltdown; not to counter it. And the overrun spend in revised estimates for debt waiver, Sixth Pay Commission, and subsidies are mere short-provisioning in the 2008-09 Budget.

Even if the global meltdown had not taken place, these extra expenses would have had to be booked in the Budget. Only the fall in excise and Customs collections of Rs 28,000 crore [Rs 40,445 crore less 30.5% due to the States], and Plan expenses [both capital and revenue] of Rs 40,000 crore — totalling Rs 68,000 crore — could be related as stimulus. But, here too, if the 0.5% negative growth in manufacturing and fall in the growth of imports by half in the later part of 2008-09 are reckoned it may well be fall in revenue due to meltdown rather than the stimulus to counter it.

Looking at the current year also, the perception that the Finance Minister has attempted to spend his way through to counter the meltdown is clearly wrong. Out of the extra spend of Rs 1,20,000 crore proposed in the 2009-10 Budget over the previous year, Rs 44,000 crore is again on account of the Sixth Pay Commission dues; Rs 33,000 crore for extra interest; Rs 10,000 crore for non-Plan grants to States; Rs 10,000 crore for contribution to the IMF and loans to PSUs; these add up to Rs 97,000 crore.

It is only because of the fall in fertiliser subsidy and allied items by Rs 29,000 crore, this gross extra spend gets reduced to Rs 78,000 crore. Not a single rupee out of this is stimulus to counter the slowdown. It is only the Plan allocation of Rs 42,000 crore, which includes the extra provision of Rs 25,000 crore for NREGA, that passes off as stimulus."